A Tale of Two Stimulus Payments : 2001 vs . 2008

In response to the sharp drop in economic activity, employment, and earnings that took place around the Great Recession, governments around the world enacted substantial stimulus packages. The exact composition of these fiscal interventions varied greatly across countries, but a common ingredient was the disbursement of fiscal stimulus payments (or tax rebates) to households. Examples of this policy instrument can be found in the most recent stimulus plans in the U.S., Australia, and the U.K., as well as in fiscal policy responses to previous recessions. The key advantage of fiscal stimulus payments is their ease of implementation and, hence, the speed at which they put cash in consumers’ wallets. This is in contrast to large scale government purchases or monetary policy interventions which are known to have lagged effects on the real economy. Their objective is twofold: alleviating households’ economic hardship and setting in motion a “fiscal multiplier” that, in some cases, can have a short-run beneficial effect over and above the direct impact on handout recipients. A necessary condition for the policy to achieve these objectives is that the household marginal propensity to consume (MPC) out of the stimulus payment be substantial. Obtaining empirical estimates of the size of the MPC out of tax rebates (or, more generally, out of anticipated and transitory income changes) can be challenging (see Jappelli and Pistaferri, 2010, for a survey). Recently however, significant progress has been made in measuring the consumption responses to the U.S. stimulus payment